Hidden AI Risk: What Every Tech Company Should Know About Liability and CoverageRetro or Retrospective Rating Plans for Workers Compensation are sophisticated rating programs designed where the final premium paid is based in some fashion on actual losses incurred during the policy period. These plans are complicated and many times used as an alternate funding mechanism.
Used and managed properly they can be a valuable tool in controlling the total cost for a workers compensation program. When used or managed improperly they can lead to costly overpayment of premium and expensive legal disputes and litigation between the insurance carrier and the employer.
There are several different types of workers compensation retrospective rating plans, but we will focus on the two most common: the Incurred Loss Retro and the Paid Loss Retro, both of which are recognized rating structures maintained by NCCI.
Key Takeaways
- Retro plans base final workers’ comp premium on actual losses during the policy period, not a fixed rate.
- Incurred Loss Retros suit accounts with $200K+ in premium; Paid Loss Retros are for larger accounts, typically $1M+.
- Claims handling quality has an outsized impact on the final premium under a retro plan.
- Retros can lower costs when claims experience is good — but can raise costs significantly when it isn’t.
The Incurred Loss Retro Plan
The Incurred Loss Retro Plan is probably the most popular due to the lower upfront cost to setup and begin the plan and typically reserved for those with premiums in excess of $200,000+.
The Paid Loss Retro Plan
Paid Loss Retro’s are reserved for larger clients, they are more difficult to attract insurance carriers, much more costly to setup and usually reserved for those clients paying premiums in excess of $1,000,000.
How do claims affect a Workers Compensation Retrospective Rating Plan?
Claims, and just as importantly, claim handling by the carrier and insured, have an enormous effect on the retro and the ultimate premium an employer will pay. Remember, the whole idea around a retrospective rating plan is that the insured is responsible for paying the claim cost which is determined by an annual recalculation of the retro after the development of losses for the policy period in question. So this type of plan is all about the claims! It cannot be stressed enough that proper claim handling must occur — which is exactly where Heffernan’s claims advocacy support makes a measurable difference for employers on a retro plan.
Who should consider using a Retro Plan for Workers Compensation Funding?
Employers who are approached to use a retrospective rating plan should consider these typical factors. Retrospective rating plans work best for accounts;
- With large workers compensation premium;
- Who are stable and established;
- Who are financially stable and sound;
- Who have experienced some claim frequency;
- Who have valid, consistent claim data available for analysis;
- Who have had better than average claim experience;
Today, more employers are re-evaluating alternative risk financing as traditional guaranteed-cost premiums continue to rise — retro plans remain one of the more established options for stable, larger accounts.
What are the advantages of a (Retro) Retrospective Rating Plan for an employer?
- They can be the least expensive option for securing workers compensation coverage;
- They are somewhat easily available, depending on the current market place and carrier availability;
- The rating options and plan design are very flexible;
- They create strong loss control incentive
- They provide an excellent cash flow possibility
What are the disadvantages of a Retrospective (Retro) Rating Plan?
- They can be the most expensive option if loss experience is poor during the retro period
- The functions of the plan are not understood, lack of understanding how the adjustments work and creates a problem for an employer’s accounting and budgeting
- Can lead to large annual cost of risk fluctuations
- Often require high collateral and audited financials
- Poor handling of claims can cause higher cost
Considering a Retro Plan for Your Workers’ Comp Program?
Retro plans can be one of the most cost-effective ways to fund workers’ comp — but only with the right claims handling and structure behind them. Heffernan’s risk advisors help employers evaluate whether a retro plan fits their claims history, cash flow, and risk tolerance.
Talk to a Heffernan risk advisor →
Jordan Markuson of Heffernan Insurance Brokers strategizes with clients to form a unique insurance program best fitted to their exposure, risk tolerance and cash flow. Jordan champions a holistic approach to the marketing, loss control, actuarial and claims process that significantly reduces premiums.
